One thing about using data to form your outlook… you’re not always going to be part of the “in” crowd.
If I wanted to be popular, I would join with investors who are at best sitting and waiting and at worst fleeing stocks.
The latest AAII Sentiment Survey showed individual investors were more pessimistic than usual for 10 weeks in a row. Optimism was unusually low for the 49th time in the past 69 weeks.
But go back six months to the lows of last October, and what do you see?
Some volatility, yes. But also a clear uptrend.
Good money was made in the last six months, but I fear even more was not made because investors only paid attention to the headlines and not what was really going on in the market.
Stocks were falling and investors were in a foul mood last October. Everyone was talking about inflation, the hawkish Fed, the potential for recession, and the crypto winter.
Nobody was talking about a bull market in stocks.
But we were in my Quantum Edge Pro service. We predicted a “Big Lift” in stocks, and that’s what we got. And the sectors we pinpointed – Technology and Discretionary – led the way.
Now, exactly six months later, the financial landscape is once again lousy. We still have inflation. Interest rates are at their highest level in nearly 15 years – with a risk that they’re going too high. The economy is slowing. Talk of recession has picked up (again). And Washington is driving America into yet another debt crisis.
All real. All important. But not what’s most important.
The triggers are there to ignite a powerful new rally in stocks… call it the “Big Lift 2.0.”
Catalyst #1: The End of Rate Hikes Is Near
A little over a year ago (March 16, 2022), the Federal Reserve began raising interest rates to try to fight persistent and concerning inflation.
Eight increases later, rates are as high as they’ve been in nearly 15 years, and the pressure is on the Fed to pause before overdoing it and damaging the economy.
CME Group’s FedWatch Tool shows investors assign a greater than 90% probability of a quarter-point increase on Wednesday… and a more than 60% likelihood that will be the last of the rate hikes. At least for now.
This is the biggest and darkest cloud hanging over stocks right now, and it looks as if skies are finally about to brighten.
That’s in part because…
Catalyst #2: Inflation Is Cooling
The Fed’s war on inflation is working.
The only question has been whether the central bank would overshoot and end up doing more harm than good.
I don’t see that being the case, if Fed Chair Jerome Powell and company are smart and hit the pause button now while they can.
Inflation is still higher than anyone would like. You and I don’t like paying the prices we’re seeing for groceries, gasoline, eating out, vacations, or anything else. And the Fed targets a 2% rate. But no one can deny that prices are increasing at a much slower pace than they were last summer.
Higher interest rates have cooled inflation, and they continue to cool inflation.
Of course, they’ve also cooled the economy, too. But thankfully, not enough to create massive problems.
We know that because…
Catalyst #3: Earnings Are Working
We are in the throes of quarterly earnings reports, and this has been one of the stranger seasons in a while.
But so far it is playing out as I expected, which means earnings are “working.”
According to FactSet, 79% of S&P 500 companies reporting so far have beaten earnings expectations. That’s with 53% of S&P 500 companies reporting, so we have a large enough sample size to spot a trend.
The trend is true of revenue as well, with 74% of companies beating sales estimates.
Outstanding reports from major bellwethers like Microsoft (MSFT), Amazon (AMZN), and Meta Platforms (META) helped the tech sector. And Chipotle Mexican Grill (CMG), shares of which I own, blew away earnings estimates in the discretionary sector.
I expect earnings to continue working. And this ongoing realization that things aren’t as bad as feared provides another catalyst for the next Big Lift.
Catalyst #4: Cash on the Sidelines
You need fuel to launch, and right now there is more fuel for stocks than ever.
Record amounts of cash are just sitting there as investors have that deer-in-the-headlights look, not knowing what to do.
I know it’s a little hard to see the numbers, but this chart shows the total assets in money market funds going back to 1945.
That’s $5 trillion in those cash accounts – and it’s far and away the most in history.
It won’t stay there.
Money managers aren’t paid to park funds in cash accounts. There’s an inherent pressure to have that money working.
And once these catalysts kick in, FOMO (“fear of missing out”) will also kick in, and we could see a tidal wave of cash coming back into stocks.
Quite simply, there are no better alternatives.
One of the distinguishing features of my Quantum Edge system is its ability to track what Big Money is buying and selling. It does so by showing green bars, and I expect to see a lot more of those in coming months.
The only way to make sure you don’t lose money is to keep it in cash. And with inflation, that isn’t even true as cash loses value.
And… the only way to make sure you don’t make money is also to keep it cash. You may squeeze out a few percentage points, but not the kind of money you need to achieve your goals.
If I could say one thing to every investor right now, it would be to get that cash off the sidelines and into the best stocks in the market – the stocks with the highest probability of making you good money.
And as is always the case, these are the rare stocks with superior fundamentals, the strongest technicals, and Big Money pouring in. The stocks with the highest Quantum Scores.
Editor, Jason Bodner’s Power Trends